Reasons for choosing a short sale over foreclosure

For many home owners the short sale is the preferred solution over the foreclosure. Here are some reasons why:

(A quick note before we proceed with the list below: Our real estate team recommends you pursue all of your options, including working proactively with your lender, to discuss solutions other than a short sale or foreclosure. If you do pursue a short sale we highly recommend you work with an attorney who will work to protect your best interests and work to minimize a short sale's impact on your credit score. Our real estate team includes the services of an attorney for our short sale clients.)


Future Fannie Mae loan for a primary residence

Foreclosure: A home owner who loses a home to foreclosure is ineligible for a Fannie Mae-backed loan for a period of 5 years.

Short sale: A seller who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years.


Credit score

Foreclosure: Credit score may be lowered by 250, 300, or more points. Credit will typically be affected for 3 or more years.

Short sale: Late mortgage payments are recorded, which does negatively impact credit score. After the sale the mortgage is reported as "paid in full", "paid as agreed", "paid as negotiated", etc. A short sale typically decreases a credit score by a lesser amount than a foreclosure, and credit can be repaired in as little as 12 to 18 months. As we mention in the note above, we recommend you use the services of an attorney during the short sales process, so you a have a qualified legal expert who is protecting your interests and working to minimize the impact of the short sale on your credit score.

Credit history

Foreclosure: Will remain on a person's credit history for 10 or more years.

Short sale: A short sale is not reported on a person's credit history. There is no explicit recording item for a short sale.

Future employment

Foreclosure: Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have, and in many cases will challenge employment.

Short sale: A short sale is not reported on a credit report and is therefore not a challenge to employment.

Current employment

Foreclosure: Employers have the right and are actively checking the credit of employees who are in sensitive positions. In some cases, foreclosure is reason for reassignment or termination.

Short sale: A short sale is not reported on a credit report and is therefore not a challenge to employment.

Security clearance

Foreclosure: Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. If a client has a foreclosure and is a police officer, in the military, in the CIA, or in any other position that requires a security clearance, in many cases clearance will be revoked and the position will be terminated.

Short sale: On its own, a short sale does not challenge most security clearances.

Deficiency judgment

Foreclosure: In 100% of foreclosure cases (except in those states where no deficiency is recorded), the bank has the right to pursue a deficiency judgment.

Short sale: In some successful short sales, it is possible to negotiate with the lender to give up the right to pursue a deficiency judgment against the home owner. We recommend you use the services of an attorney when it comes to negotiate the recording of the deficiency.

Deficiency judgment (amount)

Foreclosure: In a foreclosure, the property will end up being owned by the lender if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.

Short sale: In a well-managed short sale, the home is sold at a price that is close to market value. In almost all cases the short sale price will be higher than an REO price, resulting in a lower deficiency.

This information comes courtesy of the Distressed Property Institute. We'll continue to cover the short sale market in more detail over the next few weeks.

Have a good day,

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com